Without growth, Europe risks disintegration
Why governments must make use of ECB headroom
by Stefan Bielmeier
Fri 24 Apr 2015
The European Central Bank has ensured that the euro area's fundamental divergences have so far not spilled over to the financial markets. But the ECB alone will not be able to support the system indefinitely. The sole sustainable way forward lies in more economic growth and stronger political integration.
The ECB started with its securities markets programme in 2010, carried on in 2012 with the (unused) outright monetary transactions programme and has now triggered a government bond purchasing programme exceeding €1tn. Across the euro area – with the exception of Greece – yields and interest rate differentials are extremely low. But despite the ECB’s efforts to preserve the ‘singleness’ of monetary policy, there is still a danger that euro members will no longer be perceived as a coherent community, hurting market confidence and casting doubt on the euro’s continued existence.
With the fall in interest rates, the basic conditions for fiscal policy have greatly improved. But member countries lack the political will to make the best use of the headroom the ECB has given them.
There are some positive pointers, with activity picking up across the euro area. GDP growth should be around 1.5% for the next two years – perhaps higher, according to the ECB. Stronger growth will help reduce unemployment, a prime focus of disparity. The jobless rate is 25% in Greece, Spain, Cyprus and Portugal but only 5% in Germany, Austria and Luxembourg.
Lowering these divergences will take the wind out of the sails of eurosceptic parties across Europe. But Europe has to use the opportunity to improve medium to long-term prospects. There is no escaping painful structural reforms.
Many southern European countries have taken necessary action to consolidate budgets, cutting welfare and pensions, lowering employment and salaries for government workers, and raising taxes.
However the largest three economies have not matched the efforts of many southern states. France could become a permanent source of economic sluggishness. It has not initiated the right reforms to roll back the public sector and consolidate budgets. Italy needs to tackle weak productivity, reform the labour market and boost public sector efficiency. The coalition government in Germany risks undermining recent years’ economic achievements, with both pensions policy and the minimum wage agreement damping growth potential.
The protest marches in Frankfurt coinciding with last month’s opening of the ECB’s new Frankfurt headquarters underline the discontent over measures to tackle Europe’s structural and economic problems. Rescue packages to stave off default in struggling member states have unleashed predictable dissatisfaction in these countries. Yet the Greek saga underlines that tough negotiations on austerity and reforms have not always led to satisfactory implementation, causing growing dissatisfaction among citizens from countries both providing and receiving the financing. Unless growth resumes and political integration takes off, the ECB will be caught in the middle of simmering discontent from debtor and creditor nations.
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